By Michael Sankowski
The first negotiation with your first Chinese supplier is done! They can provide the exact part you need. They can deliver it on time.
And they are even willing to price the parts in US dollars for you! You can send them USD to pay, just like you are doing today with your other vendors.
Paying in US dollars has some real benefits – the pricing is easy to understand, and nearly all banks can send USD wires overseas. It is an easy and common solution to paying for imports. Still, you might be passing up real money.
Paying in US dollars is easy for you, but is this convenience worth the price you pay for it? In general, if you do not know who is paying for the foreign currency risk, it’s probably you.
Fast forward a few years, and your business has grown substantially. In 2014, you were doing a quarterly order for $20,000 from overseas. Today in 2016, you are doing $220,000 per month overseas. Your vendor has been kind enough to keep prices in USD for you, and they even offered to cut prices by 3 percent.
While this seems like a great deal, it’s actually not. The US dollar has gained substantially over the last 2 years – nearly 8 percent against the Chinese yuan, and 17 percent against the euro. The 3 percent discount they are offering you is trying to distract you from the fact they are making much more money today than they were two years ago. On the $2.4 million you are sending to them this year, you are paying these vendors between $80,000 and $450,000 more than you would have by first getting a quote in the home currency and paying them in their home currency.
Foreign exchange payments are easier than you might imagine, and literally thousands of small businesses are doing it in the US right now. Foreign currencies may seem confusing at first, but how to do it quickly become second nature.
So - what can you do now? How can you get started?
A good first step to getting your best possible pricing is to ask for prices in the home currency of your partner companies. Asking for an invoice in a foreign currency will almost certainly save you money over the long run. Ask for a “dual currency invoice” – where the invoice has prices in both US dollars and the foreign currency. And then ask them how you can pay them in their home currency.
Getting prices in the home currency will benefit you in at least three ways:
1. You establish a baseline price
2. You find out how much of a currency buffer you are paying to your vendor
3. You increase your credibility with you vendors
Establishing a baseline price is the most useful part of this process. Getting prices in a foreign currency gives you real insight to what prices your vendor considers to be fair right now.
Warning: asking for pricing in their home currency can be a sensitive topic. Asking for this kind of quote signals to your partners you have some knowledge about currency markets. Some foreign vendors will not want to provide this quote, as they will no longer be able to hide price increases in the currency markets.
Additionally, once you get this price, it is easy to back in time and determine what they were charging you in prior years. You’ll be able to ask them why prices are so much higher today. I’ve done this with many clients to show them what is really happening with their foreign partners, and I can help you too. You will have much more understanding of their pricing with this information.
Next, you will be able to determine what kind of currency buffer they are building into their current pricing. What is a currency buffer? It is the amount companies add to a price if they are accepting payment in a foreign currency. Most companies will take their price in their home currency, and then add in 2 to 10 percent to price it in a foreign currency. This buffer protects them against currency rate.
There should be some currency buffer added to the price. It’s just a matter of how much is fair for your situation and delivery process. I can show you to calculate how large the currency buffer is on these invoices, and also determine if this amount is fair for your situation.
This additional information will increase your credibility with vendors and allow you to negotiate better prices. You may need to pay them in foreign currency to take full advantage of the better pricing you might get. In many cases, the better pricing is worth the small additional difficulty of paying in a foreign currency.
Start the entire process off by asking for prices in the home currency of your vendor – it’s a good way to get better prices.
Michael Sankowski has been working in foreign exchange since 2006. In that time he has had a 2,000 subscriber newsletter on currencies, been the featured FX analyst on several websites, and designed a patent pending currency product. Currently he is a business development executive with AFEX, a provider of foreign exchange and global payments processing.